I have not been worried about the state deficit for sometime, ever since Mr Brown found out that the UK state can literally print money to pay its bills. Mr Osborne, originally a critic of this in opposition, then discovered its charms in office as well. It turned out to have no adverse consequences on shop price inflation, though of course it caused massive price inflation in government bonds, because it was accompanied by severe pressure against bank lending to the private sector to avoid an inflationary blow off. I always adjust the outstanding debt by the £435 bn the state has bought up, as this is in no sense a debt we owe. So our government borrowing level (excluding future state pensions which some here worry about and which have always been pay as you go out of taxation) is modest by world standards at around 65% of GDP, and at current interest rates is affordable.

Most of the state debt we owe to each other anyway. The government owes it to taxpayers who own the debt in their pension funds and insurance policies. The state can always raise enough money to pay the domestic bills backed by the huge powers to tax, and as we have just seen when credit expansion and inflation are low it can also use liquidity created by the monetary authorities.

To many who read this blog that will be unsurprising stuff. Except, that is, for the fact that it comes from far-right Tory MP John Redwood, who put it in his blog yesterday. He follows it with some usual xenophobic comments on the EU and aid, meaning the man is not reformed in any way, but what he has done is let an enormous cat out of the bag.

He has admitted there is no need for a government to balance its books.

He has admitted QE cancels debt.

He has then admitted the whole ‘passing debt to the next generation’ phobia is wrong.

And he has admitted as a result that there was no reason for austerity, the imposition of which served no economic purpose.

As a result he has, in two paragraphs, shredded the whole economic rationale on which he has been elected to Parliament.

And in so doing he has driven coach and horses through all those who still say that austerity must continue, because what he has done is make clear that if this is economically unnecessary then it can only be driven by incompetence, or a hatred of government, or class warfare, or all three.

He is right on this. Deficits do not matter if there is less than full employment. And governments can cancel debt, at will. Debt, in fact, only exists as a favour to financial markets, who desperately need it but have no hold over government as a result.

What does matter is that people like him do not want to use this knowledge for the good of people in this country and elsewhere.

46 Responses

I wander if the Bow Group will call for his expulsion as they did for Heseltine’s ‘heresy’?

Redwood is member is he not?

When you see things like this you realise how cunning the Tories have been and how they have mismanaged the country. That they artificially created a crisis within the fall out of a real crisis (2008) in order to change the structure of economy.

“When you see things like this you realise how cunning the Tories have been and how they have”….deliberately………” mismanaged the country” – sorted it for you. Given Deadwood’s admission .. what they did was deliberate & they knew it. There is a word for citizens of a country deliberately harming it & their fellow citizens – treason.

Austerity, for Redwood, is just a question of perspective. From a nurse’s perspective (£22k) inflation and rising hospital car park charges might seem to be extracting the Michael. From the point of view of an MP on £77k plus expenses and subsidised wining and dining things aren’t that bad. A senior judge being recommended for a 17% increase might ask austerity? what austerity? For our head of state to have her salary doubled, well…let them eat cake?

Not just the structure of the economy did they want to change, but the whole structure of society (sorry, there is no such thing). For the past 38 years or so Tories, real and lite, have aimed to create a corporatocracy, to reward the 1% and especially the 0.1% and kick everyone else. The Crash was simply an excuse to push through some of the nastiest social policies in living memory under the guise of tackling the debt & deficit. Here was an ideal chance to assault the welfare state, workers, the poor, the disadvantaged, the sick and disabled and hand over power to the rich and wealthy and call it “balancing the budget”.

Yes, it’s class warfare, (Buffet said this some years ago) and they have won because their dissimulation was more convincing, while the opposition was either in large agreement (remember the 184 who didn’t vote against Tory cuts?) or incompetent. We reap what they have sown.

Mr Redwood wrote –“I have not been worried about the state deficit for sometime, ever since Mr Brown found out that the UK state can literally print money to pay its bills.
Mr Osborne, originally a critic of this in opposition, then discovered its charms in office as well.
It turned out to have no adverse consequences on shop price inflation, though of course it caused massive price inflation in government bonds, because it was accompanied by severe pressure against bank lending to the private sector to avoid an inflationary blow off.“

Surely bank lending to businesses was suppressed because the banks were reluctant to lend into an economy where the government were implementing an austerity agenda which would suppress economic growth, and hence businesses ability to service the debt.

Exactly. I know plenty of people who were put off starting new ventures because although it was there (and not always so cheap either) at the investment end, there was no real money to sustain such investment.

I think this merits a response by Redwood, or at least being brought to his attention. Is it possible, Richard, to put a link to this article on Twitter and tag Redwood in it? That way is gets not only to him, but to his supporters who wouldn’t otherwise be on or be aware of this blog.

Surely this is something which you would hope a left-leaning newspaper such as the Graun ought to latch onto?

Worth asking for a comment at the very least as well as pointing out the hypocrisy of his voting record. I very much doubt there was any pro-austerity vote which he failed to back. Given the ‘modest’ level at which he say our government debt stands, he surely can’t have thought that removing the deficit was so imperative during a fragile recovery so why did he vote for pay freezes on public sector workers such as nurses, teachers, etc?

I’d think this is Redwood positioning himself, as we’ve seen Soubry attempt already, to be at the forefront of any new party which forms after the inevitable break-up of the Tories as we’ve known them. The end is surely nigh for them now, you couldn’t get clearer indication. Not only are Soubry and Redwood abandoning ship, they’re trying to set up a new fleet with themselves in charge. They’d be in a position to know what’s what so this is tantamount to public admission the old order is done for. Really, looking at Gove, May, Johnson, Grayling, Duncan Smith, Rees-Mogg etc., who can be surprised?

Let’s hope so Bill, they’ve been in power for far more years than they deserve. As you say, given the Brexit debacle, with May trying to pander to the anti EU fanatics whilst trying to keep the moderates (i.e. Tories who possess some degree of sanity) on board, a fatal split seems inevitable when she can longer defer any of the crunch decisions.

Is she sticks to her economically suicidal course of leaving the SM and CU, hopefully the ‘sane’
ones will side with the progressives in Parliament to bring about a vote of no confidence.

Yes Bill, this fracture line in the Conservative Party is a purging of [Tory] myths. Rory Stewart, the Prisons Minister has joined in this purge of notorious myths, today – “Conservative MP Rory Stewart has been praised for calling out the myth that there are families with three generations out of work as false.” [1] Reminds me of rhetoric from the Lib-Dems many moons ago that they were the party of honest politics.

Of course the government must balance its books. That’s how we know if we are in surplus or deficit. The budget is an annual accounting convention. If taxes add to more than spending the “surplus” is not saved money. It is a hole that has to be filled by contributions from the non government sector to arrive at zero.
So that’s why we have austerity. The ignoramuses who form policy aim for surpluses without the comprehension that they achieve deflation, recession etc. To grow aggregate demand the economy must be in deficit, which adds to savings and boosts GDP.

Austerity is merely an excuse to destroy publically funded healthcare, social security, housing etc. And the political party responsible for this has the vomit inducing hypocrisy to wrap themselves in the union jack and call their left wing opponents ‘unpatriotic’.

maybe I’m being cynical, but could it be that many of Redwood’s ilk were well aware that QE could be used for other purposes but chose not to acknowledge it until it was in their interest? a QE funded stimulus would certainly help alleviate the effects of a hard Brexit and/or reduce the chances of a Corbyn led government.

in any case it’s good that Richard’s idea of QE for the people might finally be taken seriously. i look forward to hearing BBC experts explain how printing money is okay after all.

If John Redwood can understand this why is the Labour Party so quiet on the issue? I’m afraid they might find themselves on the wrong side when the paradigm shift becomes an avalanche and Liam Byrne’s utterances look like 19th century economics.

It is one thing to accept that MMT is an explanation for economic systems with a fiat currency it is another to entrust anyone with a mandate to print, spend then tax. The notion of a democratically elected Government only runs so far as the vast majority of the electorate don’t really trust politicians or the political process certainly not to the extent of control that printing allows. It all agreed that public spending should go up from here, probably quite drastically. Tax & NI levels feel high already but they would have to go higher. I have no idea of the trade off or sensitivities between additional public spending and tax – does anyone? Also currency markets are notoriously unpredictable and could clearly have a massive effect on the inflationary outlook. The concern for all would be that any country which have openly printed to spend (and there have been a lot) it has never ended well and often it is a disaster. This obviously isn’t criticising MMT as a theory it is more a reflection of the point who can you ever allow to have so much control?

So, you think money markets should control the economy and democratically elected polticians should not, even though money markets only trade in commodities that exist because of government protection, and in many cases, manufacture

Might you explain that?

What’s your contempt of the will of people expressed through the ballot box based on?

I think what we are seeing is much simpler than many of the commentators are suggesting. Fundamentally Tories believe that any money spent on any public services is money that has to be found. That funding has to come from somewhere and they appreciate that, as they are wealthy, it will disproportionately have to come from them. They have no interest in ridiculous ideas of equality or quality of service. They only want to keep the money. Austerity has allowed them to keep a lot of money. They have become even richer. This is simply the fundamental view of the real Tory. We shouldn’t really be surprised! Austerity is a great deal for them. Unfortunately it is not that great for anyone else.

Interesting point about why tories behave badly towards welfare etc.
What we have to do is disabuse them of the notion they are paying for welfare etc.
In fact we here know deficit spending by the federal governments buying the welfare etc debts. Tories are off the hook [on that one].

It seems to me that there is a world of difference between, on the one hand, fiscal deficits for investment that are funded by gilts that have below inflation interest costs, and on the other hand, PFI scheme liabilities that charge very high interest. Under the Tories we have had very high current account deficits and those have come from us getting goods and services from overseas in return for people in other countries gaining financial claims over here. Much of those foreign claims over the UK are in the form of very high return PFI deals etc. That really is the Tories causing future generations to be on the hook for current foolishness. John McDonnell and Corbyn would reverse that. They would invest using low cost central government financing and stop PFI deals. If that led to some immediate term currency depreciation, that would simply be part of the UK closing the current account deficit.

a. He did not say anything like ‘austerity wasn’t necessary’. You just disregarded the rest of the post about the debt he was more concerned about.
b. The lib-dems had a far greater commitment to debt reduction in their pre-coalition manifesto than the Tories and were more worried about debt and deficits generally – as by and large were the population who voted for parties that didn’t leave the nation near-bankrupt.
c. I presume you must be also condemning the EU policy of forcing austerity on the Greeks. This is the crux of the issue that Brexiters have with the EU; that they never admit to bad policy even when it is blindingly obvious and they are incapable of reform due to being fundamentally undemocratic. Some of us like a European union – but not this one.

But gee I thought the financial crisis had laid waste to all the silly monetarist theories that debt didn’t matter.

The deficit I worry about much more is our external deficit. That is the one where we have to buy foreign currencies to pay for it. It is the reason why we keep selling some of our best property and business assets to foreigners, and why we have to borrow abroad. Running at around 5% of GDP it is high by world standards, and means we gradually get into more debt or sell more assets to keep up with it. When you owe money to foreigners they may not accept money created to pay them off but will need real assets.

Assets are houses are they going to live in them move them to Barbados?